European Union Archives - Page 4 of 22 - An Economic View of the Environment

New Podcast on Carbon Markets & International Cooperation, Direct from UN Climate Change Conference in Madrid

In my previous posting as this blog, What to Expect at COP-25 in Madrid, I wrote about the “Rulebook” for the Paris Agreement, which puts flesh on the bones of the skeletal 13-page Agreement. It was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially facilitates international carbon markets and other forms of cross-border cooperation.

In the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” our focus is on precisely this topic in an interview with an individual who has had tremendous experience in this realm, Andrei Marcu, the founder and executive director of the European Roundtable on Climate Change and Sustainable Transition. You can listen to the interview here.

In hosting these podcast episodes, I interview interesting and accomplished people who are working at the intersection of economics and environmental policy. Our first episode featured my interview with Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency (who is leaving Harvard to become President of the Natural Resources Defense Council). Our second episode featured Nick Stern of the London School of Economics discussing his career, British politics, and efforts to combat climate change.

In this third episode – recorded here in Madrid at COP-25 – Andrei Marcu provides an overview of the opportunities and challenges facing the negotiators, with particular attention to the important work now being done on carbon markets and international cooperation via Article 6 of the Paris Agreement. By the way, you can read about the other activities of the Harvard Project on Climate Agreements at COP-25 in Madrid here.

Marcu has long been engaged in multilateral negotiating processes and subsequent implementation action, both at the global and sectoral levels. In various capacities, he has acted as negotiator for developing countries, coordinator for the G-77 and China, and as representative of the international business community. He previously served as Manager of Private Sector Cooperation in the United Nations Development Programme; and founder, president and CEO of the International Emissions Trading Association (IETA).

Marcu attended the first week of negotiations at COP-25, during which time lower-level discussions were held among representatives of many of the 200 countries which signed the Paris Climate Agreement of 2016. Marcu characterizes the Agreement as a “decentralized pledge and review type of approach” to the global emissions problem, one that brings countries to the table, but also one that “creates headaches” in the market.

In the interview, Marcu says that what happens in Madrid during the coming week will be very important. “Presumably you will see three decisions – one for Article 6.2, one for 6.4 and one for 6.8,” he explained, naming three of the key sections of the Paris Agreement that are being negotiated at COP-24. Marcu also remarked that some of the most difficult decisions may be “punted” to future talks.

In general, Marcu said he is “optimistic that we are moving in the right direction” on addressing climate change, while also expressing concern about the pace of change. “To be fair, it is not an easy change. It’s quite a radical change as people are just coming to terms with what carbon neutrality means.” he stated. “It is not an incremental change. It is a radical change.”

What to Expect at COP-25 in Madrid

The “Rulebook” for the Paris Agreement puts flesh on the bones of the skeletal 13-page Agreement, and was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially provides for international carbon markets and other forms of cross-border cooperation. Watch for key developments in Madrid!

Key Challenge for Long-Term Success of Paris Agreement

There are two necessary conditions for ultimate success of the Paris Agreement. First, adequate scope of participation. This has been achieved, with meaningful participation from countries representing some 98% of global emissions – or some 85% if the U.S. withdraws in November, 2020 (compared with the 14% of global emissions from countries committed to emissions reductions under the current, second commitment period of the Kyoto Protocol). The other necessary condition is adequate ambition of the individual national contributions. This is where the greatest challenges lie.

The very element of the Paris Agreement that has fostered such broad scope of participation – namely, that the individual national “pledges” (Nationally Determined Contributions or NDCs) are anchored in national circumstances and domestic political realities – implies that individual contributions may not be sufficient, due to the global commons nature of the climate change problem, and the attendant free-rider issues.

So, are there ways to enable and facilitate increased ambition over time? Linkage of regional, national, and sub-national policies can be part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems. Linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies will be highly heterogeneous. More about this below.

Merits and Concerns regarding Linkage

Linkage facilitates significant compliance cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions. According to one recent study, costs could – in theory – be reduced to 25% of what they otherwise would be! Also, linkage means improved functioning of markets by reducing market power and price volatility, and there are political benefits to linking parties as a sign of momentum when political jurisdictions band together. Another advantage is administrative economies of scale. Finally and very importantly, linkage allows for the UNFCCC’s key equity principle of “common but differentiated responsibilities and respective capabilities” (CBDR) to be achieved without sacrificing cost-effectiveness.

There are also some legitimate concerns about policy linkage. First, there are distributional impacts, both in the form of redistribution within jurisdictions, and redistribution across jurisdictions. Such impacts are politically problematic. There is also the automatic propagation of some design elements, in particular, the cost-containment elements of banking and price collars which propagate from one linked system to another. For that matter, weak design in one jurisdiction affects prices and quality in all linked jurisdictions. And price shocks can propagate through linked jurisdictions. Finally, there is decreased autonomy, as rules are set jointly by all linked parties.

Linkage and the Paris Agreement

There are three distinct but closely related levels of relevant policy action. First, national (or regional) governments can establish emission-reduction policies, including carbon taxes, cap-and-trade systems, and performance standards. Second, these jurisdictions can link their policy instruments through mutual recognition of permits, allowances, or credits via bilateral agreements. This allows trade of these units across international borders, which facilitates lower-cost achievement of the aggregate target. But such transfers of emission reduction responsibilities and actions need to be correctly counted toward compliance with respective NDCs under the Paris Agreement. This is where Article 6 comes in!

In particular, Article 6.2 provides for Internationally Transferred Mitigation Outcomes (ITMOs) and Corresponding Adjustments, which together can function as the international accounting mechanism to correctly reflect a multiplicity of international private-sector exchanges (under various international linkages).

In other words, I view ITMOs as units of accounting for Corresponding Adjustments, not as a medium of exchange for government-government purchase and sale. Otherwise, Article 6.2 would become equivalent to the Kyoto Protocol’s Article 17 (international emissions trading), and will fail as that did, because governments are not cost-minimizing agents, and lack requisite information even if they were (Hahn & Stavins, “What Has the Kyoto Protocol Wrought? The Real Architecture of International Tradeable Permit Markets,” 1999).

Is Heterogeneity a Challenge for Linkage?

Yes, it can be. There are three major categories of heterogeneity that can pose challenges to effective international policy linkage under the Paris Agreement. First, there are heterogeneous policy instruments: cap-and-trade; tradable performance standards; emission reduction credits (offsets); taxes; and performance standards. Second, there are heterogeneous jurisdictions and geographic scope: regional, national, and sub-national; and status under the Paris Agreement (Party and non-Party). Third, the NDC targets themselves area highly heterogeneous: hard (mass-based) emissions caps; relative mass-based emissions caps (relative to BAU); rate-based emissions caps (per unit of economic activity or per unit of output); and non-emissions caps, such as some degree of penetration of renewable energy sources. Also, there are differences in base year, target year, sectors, GHGs, estimated global warming potential, and conditionality.

Is Linkage Among Such Heterogeneous Policies Feasible or Wise?

With Michael Mehling (MIT) and Gilbert Metcalf (Tufts University), I have carried out research on heterogeneous linkage and the Paris Agreement (“Linking Climate Policies to Advance Global Mitigation.” Science 359, 2018). Among our major findings is the following. Most features of heterogeneity do not present insurmountable obstacles to linkage, but some present real challenges, and indicate the need for specific accounting guidance to avoid double-counting. Article 6.2 provides an obvious home for this accounting guidance (Schneider, Duan, Stavins, Kizzier, Broekhoff, Jotzo, Winkler, Lazarus, Howard, and Hood. “Double counting and the Paris Agreement rulebook.” Science 366, 2019).

The Outlook for Heterogeneous Linkage under Article 6.2 of the Paris Agreement

The negotiators in Madrid have an opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2. A robust accounting framework can foster successful linkages of climate policies across jurisdictions. But if guidance extends much beyond basic accounting rules – such as implicit taxes on cooperation via what have been termed “share of proceeds” and “net global emission reduction” – then restrictive requirements will impede effective linkage, and thereby drive up compliance costs. True to the spirit of the Paris Agreement, less may be more!

So, a combination of sensible common accounting rules and absence of restrictive criteria and conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, and – most important – thereby increase the latitude of Parties to scale up the ambition of their NDCs.

Only time – and the work of the delegates in Madrid – will tell.

The Harvard Project on Climate Agreements at COP-25

Along with my Harvard colleagues, Joseph Aldy, Robert Stowe, and Jason Chapman, I will be at the Twenty-Fifth Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) in Madrid, Spain, leading our delegation from the Harvard Project on Climate Agreements (HPCA), December 8-11, 2019.

In addition to holding a series of bilateral meetings with various national delegations, I will participate in at least four events. Two of these are panel sessions organized by HPCA, while the two others are panel sessions organized by national delegations. Our team will be at COP-25 during the week of December 8-12, 2019. COP-25 attendees who wish to meet with the Harvard Project during the conference should send an email Jason Chapman, Project Manager (jason_chapman@hks.harvard.edu).

Four Events in Brief

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by Harvard Project on Climate Agreements, Enel Foundation, and Tsinghua University Global Climate Change Institute; Monday, December 9, 2019; 11:30 am – 1:00 pm; Location: Side Event Room 3

The Seventh Global Climate Change Think Tank Forum: The Latest Developments in Climate Change Economics
Robert Stavins, Presenter; Hosted by China National Center for Climate Change Strategy and International Cooperation; Tuesday, December 10, 2019; 6:00 pm – 7:30 pm; Location: China Pavilion

Realizing the Potential of Article 6 of the Paris Agreement
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by the Harvard Project on Climate Agreements; Wednesday, December 11, 2019; 12:30 pm – 2:00 pm; Location: Pavilion of the International Emissions Trading Association (IETA)

Enhancing Capacity of Developing Countries to Address Climate Change: Issues and Opportunities
Robert Stavins, Keynote Speaker; Hosted by Korea University, Green Asia, Center for Climate and Sustainable Development Law and Policy, Global Green Growth Institute, UNDP Seoul Policy Centre, UN Office for Sustainable Development; Wednesday, December 11, 2019; 3:00 pm – 4:30 pm; Location: Korea Pavilion

Two Harvard Project Events in Detail

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience

Monday, 9 December, 2019; 11:30am – 1:00pm, Location: Side Event Room 3

Speakers will present recent research and analysis of carbon-pricing policy to reduce greenhouse-gas emissions. The panel will give some attention to experience and prospects in South America and to China’s emerging national system. A new research paper by Robert Stavins on the relative merits of cap and trade and carbon taxes will provide a basis for much of the discussion.

Speakers: Joseph Aldy, Harvard University; Simone Mori, Enel; Raffaele Mauro Petriccione, Director General of DG Climate Action in the European Commission; Robert Stavins, Harvard University; Zhang Xiliang, Tsinghua University; government representatives to be invited.

Realizing the Potential of Article 6

Wednesday, 11 December 2019; 12:30pm – 2:00pm; Location: Pavilion of the International Emissions Trading Association (IETA)

Panelists will discuss the potential of Article 6 to decrease mitigation costs and incentivize increased ambition. They will review the status of the negotiations on the Article 6 rulebook, including issues remaining to be resolved at that point in the COP – including potentially, ongoing discussion about double counting (environmental integrity) and the Article 6 – Article 13 interface (applications of the enhanced transparency framework to Article 6 transfers).

Panelists: Joseph Aldy, Harvard Kennedy School; Kay Harrison, Ministry of Foreign Affairs and Trade, New Zealand; Kelley Kizzier, Environmental Defense Fund; Andrei Marcu, European Roundtable on Climate and Sustainable Transition; Robert Stavins, Harvard Kennedy School

The Path Ahead

After COP-25, I will post an essay at this blog assessing the progress (or lack thereof) made in Madrid – on Article 6, as well as other elements and issues.

In the meantime, if you will be at COP-25, and would like to meet with the Harvard Project on Climate Agreements, please contact Jason Chapman (jason_chapman@hks.harvard.edu).

A Key Issue for the Upcoming Climate Conference in Santiago

In December of this year, delegates to the 25^th Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) will assemble in Santiago, Chile, for two weeks of negotiations. The location for the Conference was changed to Santiago when the Chilean government graciously stepped in as host after the Brazilian government reneged – two months after winning the bid and one month after the election of President Jair Bolsonaro – on its previous commitment to host COP-25.

The previous year, COP-24 took place in Katowice, Poland. As I’ve previously written at this blog (”Climate Negotiations in Poland Advanced Implementation of the Paris Agreement”, December 20, 2018), the delegates at that Conference reached consensus on a 156-page “Rulebook” that filled in important details for 28 of the 29 articles of the skeletal Paris Agreement. Consensus was not reached on one very important part of the Agreement, Article 6, the home for international cooperation that can bring down costs, and thereby facilitate greater ambition.

This presents a major challenge for the delegates to this year’s COP as they seek to complete the Rulebook with details for Article 6; in particular, how to facilitate a robust system of international cooperation (that allows for international carbon markets) while avoiding the possibility of double counting of emissions reductions, that is, counting the same emission reduction more than once when assessing progress towards the achievement of climate mitigation targets.

This is the topic of an article that appeared very recently in Science, “Double Counting and the Paris Agreement Rulebook,” which I had the pleasure of co-authoring with an international set of colleagues – Lambert Schneider, Maosheng Duan, Kelley Kizzier, Derik Broekhoff, Frank Jotzo, Harald Winkler, Michael Lazarus, Andrew Howard, and Christina Hood. In this blog essay, I provide a brief summary, which I hope will entice readers to check out the full version in Science (Volume 366, Issue 6462, pp. 180-183, October 11, 2019).

The Context

It is important to distinguish among three distinct yet closely related levels of actions in regard to international cooperation under Article 6 of the Paris Agreement:

First, national or regional jurisdictions can establish domestic policies, such as emissions trading systems, carbon taxes, or performance standards, for the purpose of achieving the targets specified in their respective Nationally Determined Contributions (NDCs) under the Agreement.

Second, jurisdictions can link their respective domestic policy instruments, as, for example, California and Quebec have done, allowing allowances to be traded across international borders. Such linkage was the subject of a previous article in 2018 in Science I co-authored with Michael Mehling and Gilbert Metcalf (a more complete version of that work appeared in the periodical, Environmental Law, earlier this year).

Third, and the focus of the new Science article and this blog essay, Article 6.2 provides a potential home for accounting mechanisms (“Internationally Transferable Mitigation Outcomes” or ITMOs, and “Corresponding Adjustments”) that can properly take account of such international transfers when demonstrating achievement of national targets under the Paris Agreement.

The Risk of Double Counting

If two different jurisdictions, such as two countries with their own NDCs, were both to take credit for the same emission reductions, there would be double counting under the Paris Agreement, which would be a significant threat to the integrity of the Agreement and any carbon markets employed in its implementation. Given that half of the Parties of the Paris Agreement have indicated their intention to participate in carbon markets, avoiding (that is, reducing the risk of) such double accounting is critical for the credibility of the Paris regime. A robust system to account for international transfers of emission reductions is necessary.

As my co-authors and I explain in the Science article, Article 6.2 of the Agreement provides the needed accounting framework through provision for “corresponding adjustments,” which can function as a form of double-entry bookkeeping. But despite the fact that the Paris Agreement is explicit that double counting should be avoided, some Parties to the Agreement disagree about how it should be avoided, and indeed, about what constitutes double counting. In addition, there is some controversy related to how much international oversight is needed to ensure robust accounting

The Path Ahead

Success at COP-25 in Santiago is critical. In our Science article, my co-authors and I propose several principles to guide the negotiations. I will mention just two of these in this brief essay.

First, a single set of common international accounting rules should apply under the Paris Agreement, irrespective of what type of carbon market mechanism is used to generate emission reductions.

Second, effective accounting will be greatly facilitated by all countries adopting targets (NDCs) that are economy-wide, cover all GHGs, apply to common multi-year time periods, and are expressed as GHG emissions. The Paris Agreement expressly foresees that countries will move toward such economy-wide targets over time.

If international cooperation is to combat climate change cost-effectively, the Paris Agreement needs to employ rules for international carbon markets that ensure environmental integrity and avoid double counting. Otherwise, carbon markets may sadly undermine the Paris climate agreement.